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Bank of Canada to hold rates steady at 4.50% through this year: Reuters poll

FILE PHOTO: Governor of the Bank of Canada Tiff Macklem walks outside the Bank of Canada building in Ottawa

By Milounee Purohit

BENGALURU (Reuters) - The Bank of Canada will keep its key interest rate on hold at 4.50% for the rest of this year, according to economists polled by Reuters, who said the bank was more likely to sound a hawkish tone on March 8 than dovish as inflation remains a worry.

A slowing housing market, weak business investment and consumer spending and data showing a halt to economic growth at the end of 2022 suggest 425 basis points of BoC rate hikes over the past year are starting to take hold.

With inflation heading lower, BoC Governor Tiff Macklem has said the central bank can now afford to wait and see before doing anything more but has made clear a pause is conditional on supportive incoming data.

All 32 economists polled Feb. 24 to March 3 expect the BoC to hold its overnight rate at 4.50% on March 8. A majority forecast the BoC to keep it there for the rest of 2023, despite several more rate hikes expected from the U.S. Federal Reserve.

"Our view is that having taken a pause at this meeting, the Bank of Canada will see enough reassurance the economy is slowing and inflation pressures are abating to keep rates on hold for the rest of the year," said Avery Shenfeld, chief economist at CIBC Capital Markets.

Interest rate futures pricing diverges from the Reuters poll consensus, showing an additional 25 basis point hike to 4.75% around mid-year. There was a divide amongst economists over where the rate would be by end-December with 17 expecting it to stay at 4.50%, 13 forecasting it to be lower and two saying it would be higher.

In the meantime, Canada inflation data are headed in the right direction. Inflation slowed by more than expected to 5.9% in January, although still well above the 2% target.

But the latest gross domestic product data showed the economy in a weaker state than forecast, generating no growth in the fourth quarter of last year compared with the BoC's own expectation for a 1.3% expansion.

"It's pretty clear the data have not surprised to the upside and therefore the bank should be comfortable and keep policy on hold," said Stephen Brown, deputy chief North America economist at Capital Economics.

"Well, the interesting thing could be in the tone of the statement," said Brown, who expects a hawkish tone.

All but one of 15 respondents to an additional question said policymakers are more likely to adopt a hawkish tone at the March 8 meeting than a dovish one.

That could be partly due to expectations the Canadian dollar may weaken in coming months as the U.S. Fed and BoC diverge with rate policy, raising the risk of imported inflation through the exchange rate.

"The Federal Reserve's continued rate hikes will eventually make their way into Canadian inflation through exchange that will certainly push the Bank of Canada to do more," said Shelly Kaushik, an economist at BMO Capital Markets.

(Reporting by Milounee Purohit, Polling by Milounee Purohit and Mumal Rathore; Editing by Sharon Singleton)